Pranav B Prem

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, has held that the Supreme Court’s ruling in Northern Operating Systems Pvt. Ltd. on secondment of employees does not apply where the secondees are deputed by a foreign head office to its Indian project office. A Bench comprising Ms. Binu Tamta (Judicial Member) and Mr. P.V. Subba Rao (Technical Member) dismissed the department’s appeal against M/s Oriental Consultant Company Ltd., holding that the foreign head office and its project office in India cannot be treated as distinct persons and that such deputation amounts to “service to self”, not a taxable manpower supply service.

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Background

The department filed an appeal questioning whether the adjudicating authority erred in dropping a service tax demand pertaining to the post-negative list period (01.07.2012 to 31.03.2015) in respect of “Manpower Supply Service” allegedly provided by Oriental Consultants Company Ltd., Japan (OC Japan) to its Indian project office. The respondent is a project office of OC Japan, engaged in providing engineering and consultancy services for infrastructure projects in India. The project office, established under RBI guidelines, was registered in India as a foreign company under Section 592 of the Companies Act, 1956. It incurred expenditure for executing projects and raised invoices on Indian customers while discharging applicable service tax on receipts. All project expenses were debited to OC Japan’s accounts, with credits reflected in the head office books.

Following an audit, a show cause notice was issued for the period 2011–12 to 2013–14, demanding ₹4.33 crore in service tax under the Reverse Charge Mechanism (RCM) on the ground that the project office had imported manpower supply services from its parent company, OC Japan. The department alleged that the project office and the parent office were distinct persons under Section 66A(2) of the Finance Act, 1994, and hence, there existed a service provider–recipient relationship.

Contentions

The Revenue relied on the Supreme Court’s judgment in CC, CE & ST v. Northern Operating Systems Pvt. Ltd. [2022 (5) TMI 967 (SC)], arguing that the overseas entity provided taxable manpower supply service by deputing employees to its Indian affiliate. The assessee, represented by Ms. Shagun Arora and Mr. Kunal Agarwal, countered that the project office and the head office were not separate legal entities and that any services provided by the head office to its project office amounted to “service to self.” They emphasized that the project office operated merely as an extension of the parent company, executing contracts in India on behalf of OC Japan, and that all project revenues were remitted directly to the parent company’s bank account in Japan.

The counsel relied on a series of judicial precedents, including:

• SNC Lavalin Inc. v. CST, Delhi [2018 (2) TMI 1679 – CESTAT-Delhi]

• Lea International Ltd. v. CST, Delhi [2018 (2) TMI 1407 – CESTAT-Delhi]

• Torrent Pharmaceuticals Ltd. v. CCE [2015 (39) STR 97 (Tri.-Ahmd)]

• Computer Science Corporation India Pvt. Ltd. v. UOI [2014 (TIOL) 1896 (All.)]

These cases collectively held that a branch or project office cannot be treated as a separate entity from its foreign head office and that deputation of employees in such circumstances does not amount to manpower supply service.

Tribunal’s Observations

The CESTAT observed that the issue was no longer res integra, referring to earlier decisions in similar circumstances. It reaffirmed that the permanent establishment abroad and its branch or project office in India cannot be treated as separate entities for the purpose of taxing manpower supply. Quoting from its earlier ruling in Torrent Pharmaceuticals Ltd., the Tribunal reiterated: “It is an accepted legal position that one cannot provide service to one’s own self. If a permanent establishment abroad is treated as a service provider to its own head office in India, it will amount to charging service tax for an activity provided to oneself.”

The Bench distinguished the Northern Operating Systems case, noting that the Supreme Court there dealt with secondment arrangements between distinct legal entities, where employees of one group company were temporarily seconded to another independent affiliate. In contrast, the present case involved secondees deputed by a head office to its own project office, which are not distinct persons. Accordingly, the Tribunal held: “The decision of the Apex Court in Northern Operating Systems Pvt. Ltd. is factually distinguishable and hence no reliance can be placed thereon.”

The Tribunal upheld the order of the adjudicating authority dropping the service tax demand and dismissed the department’s appeal. It concluded that:

• The project office and head office are the same legal entity,

• The seconded employees were deployed to execute the head office’s own projects, and

• No taxable manpower supply service existed between them.

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The CESTAT New Delhi thus ruled that the Supreme Court’s decision in Northern Operating Systems does not apply to cases where employees are deputed by a foreign head office to its own Indian project office, since such deputation constitutes “service to self” and falls outside the scope of taxable manpower supply service.

Appearance

Counsel For Petitioner: AR Shashank Yadav

Counsel For Respondent: Advocates Shagun Arora and Shri Kunal Agarwal

Cause Title: Principal Commissioner of CGST & Central Excise, Delhi East Versus M/s.Oriental Consultant Company Ltd.

Case No: Service Tax Appeal No.50432 of 2019

Coram: Binu Tamta (Judicial Member), P.V. Subba Rao (Technical  Member)